ST completed the deconsolidation of its Flash Memory Group (FMG) segment and took an equity interest in Numonyx on March 30, 2008, with an anticipated one quarter lag in reporting.

ST-NXP Wireless, a joint venture owned 80% by ST, began operations on August 2, 2008 and is fully consolidated into ST's operating results. The fourth and third quarter 2008 financial review includes the ST-NXP Wireless joint venture except where noted.

Reflecting the sharp downturn in the global economy during the fourth quarter, ST's 2008 fourth quarter net revenues decreased 15.6% sequentially and 17.0% year-over-year, driven by significant weakness across most geographies and market segments, in particular Automotive, Telecom and Computer.

Reported gross margin in the fourth quarter of 2008 was 36.1%. Excluding an acquisition-related inventory step-up charge to Cost of Goods Sold of $31 million in the fourth quarter of 2008 and $57 million in the third quarter of 2008, respectively, gross margin in the fourth quarter was 37.5%, a slight decrease from 37.7% in the prior quarter. The profitable contribution from a favorable currency impact and an improved product mix were offset by the negative impact of substantially lower sales and higher-than-anticipated unused capacity charges. In the fourth quarter of 2007, gross margin was 36.9%. The Company estimates that the underutilization of our fabs negatively impacted the fourth quarter 2008 gross margin by over 200 basis points.

President and CEO Carlo Bozotti commented, "Fourth quarter net revenues came in at the mid-point of our updated outlook and reflected the accelerated level of order push-outs and cancellations and decrease in demand as the quarter progressed. All product areas were negatively affected, in particular automotive, wireless and computer peripherals. Gross margin was somewhat lower than the mid-point of our revised outlook mostly due to our final product mix being below our expectations, in particular in wireless.

"For the full year 2008, ST made significant progress as the Company gained market share with a stronger product portfolio. ST will continue this momentum in 2009 as we focus on developing more innovative products. Looking at our position in the semiconductor market, we grew our revenues faster than the overall market during 2008 and estimate we are approaching a record level of market share.

"The Company also generated net operating cash flow of $153 million for the fourth quarter and $647 million for the full year excluding M&A transactions. As a result, despite a tougher fourth quarter environment, ST completed 2008 with a solid financial position. In 2009, we will continue to focus on cash flow as well as maintaining a strong and flexible capital structure."

Operating Expenses

In the 2008 fourth quarter, combined SG&A and R&D expenses of $876 million included a full quarter of expenses and $25 million in recurring amortization charges related to the former NXP Wireless business, which were partially offset by $41 million in favorable sequentialcurrency effects. Operating expenses in the third quarter 2008 included $12 million of amortization related to the NXP Wireless purchase accounting.

Fourth quarter 2008 SG&A expenses totaled $304 million, compared to $297 million in the prior quarter, and $295 million in the year-ago quarter. R&D expenses in the fourth quarter 2008 totaled $572 million, compared to $602 million (including the one-time, non-cash $76 million charge for in-process R&D) in the prior quarter, and $480 million in the year-ago quarter.

Operating Results, Earnings and Earnings per share

For the 2008 fourth quarter, the Company reported an operating loss of $139 million and a net loss of $366 million, or -$0.42 per share compared to the year-ago quarter operating loss of $15 million and net income of $20 million, or $0.02 per diluted share. Excluding charges relating to restructuring and impairment, inventory step-up, and other-than-temporary impairments on the Numonyx equity investment and certain financial assets, the fourth quarter 2008 net loss was $57 million, or -$0.06 per share compared to the year-ago quarter net income of $255 million or $0.27 per diluted share on a comparable basis.

In the fourth quarter 2008, the loss on equity investments registered a non-cash charge of $204 million including $180 million of impairment on the Numonyx equity investment to reflect further deteriorated conditions in both the equity market multiples for comparable companies and the memory industry as well as ST's $16 million share of Equity loss on Numonyx's Q3 2008 results. Importantly, Numonyx as of December 31, 2008 held about $500 million in cash on its balance sheet, representing an amount similar to the balance at inception.

Following the prior announcements of impairment recognition in certain asset-backed securities, in the 2008 fourth quarter a new accounting valuation resulted in $55 million of pre-tax other-than-temporary impairment charges of certain financial assets. The Company is pursuing various claims against Credit Suisse Securities (USA) LLC and Credit Suisse Group relating to unauthorized purchases of auction rate securities backed by collaterized debt obligations and credit linked notes.

Cash Flow and Balance Sheet Highlights

Net cash from operating activities is estimated at $388 million in the 2008 fourth quarter, somewhat lower than the $414 million in the third quarter 2008. Net operating cash flow* is estimated at $153 million for the fourth quarter 2008 compared to $140 million in the third quarter of 2008, excluding $1.52 billion paid for M&A transactions, and $188 million in the year-ago quarter. For the full year 2008, net cash from operating activities is estimated at $1.72 billion compared to $2.19 billion for the full year 2007 and net operating cash flow is estimated at $647 million in 2008, excluding $1.69 billion paid for M&A transactions, compared to $840 million in 2007.